State and Capitalist Class in China's Economic Transition: From

POLITICALECONOMY RESEARCHINSTITUTE State and Capitalist Class in China’s Economic Transition: From Great Compromise to Strained Alliance Isabela Nogueira and Hao Qi September 2018 WORKINGPAPER SERIES Number 467 State and Capitalist Class in China’s Economic Transition: From Great Compromise to Strained Alliance Isabela Nogueira∗ Federal University of Rio de Janeiro Hao Qiy Renmin University of China Abstract This article contributes to the debate on the role of the Chinese state in economic transition by shedding light on the relationship between the state and the emerging domestic capitalist class. In contrast to the literature that regards the state as a supra-class developmental state, we argue that the relation between the state and a new capitalist class is the product of a two- way movement of top-down forces and bottom-up forces over the course of a transition from a stage of what we call ‘Great Compromise’ to a stage of what we call ‘Strained Alliance’. The state-class relation has evolved with the dynamics of class conflicts, external constraints, and contradictions within regimes of accumulation. JEL Classification: O10, O53, P16 Keywords: Chinese state, formation of a capitalist class, two-way movement, accumulation regime, developmental state ∗[email protected] [email protected] 1 1 Introduction Over the past four decades, the Chinese economy has undergone a transition from a state-socialist to a capitalism-dominated economy. This transition has given rise to not only the great transformation of the working class but also the formation of a domestic capitalist class. The economic transition has made the resurgence of the bourgeoisie particularly entwined with state structures. What role did the Chinese state play in the formation of the capitalist class? What was the impact of the new class into the state? How do state-class relations evolve with the dynamics of internal class conflicts, external constraints and contradictions within the regimes of accumulation? These are the questions to be addressed in this article. It is vastly recognized that the state continuously played a significant role during China’s economic transition. At the beginning of that transition, the state firmly controlled the economy via the central planning system. While capitalist firms play a crucial role in the economy today, the state continues to command the economy via a large state-owned, non-financial enterprise sector, a financial system dominated by a few giant state-owned banks, and a land ownership system largely controlled by local governments. State interventions in the economy are also made through indus- trial policies and control over crucial prices such as interest rates, exchange rates, and minimum wages. Some scholars argue that the state has gained stronger capacity of controlling the economy, and they express concerns over the prospect of marketization. These scholars point to recent studies showing that the fiscal revenue as a share of GDP has significantly increased since the mid-1990s (Naughton, 2017; Piketty et al., 2017). Therefore, from the perspective of a state-market dichotomy, China appears as a puzzle to the conventional wisdom, since it has witnessed both the rise of the market and a significant role of the state. The literature largely explains that puzzle by emphasizing the specificity of the Chinese political economy in terms of the relation between the state and emerging capitalists. These studies posit that the Chinese state created the new bourgeoise so that it has adequate capacity to maintain control over it (So, 2003; Dickson, 2008; McNally and Wright, 2010; van der Pijl, 2012, 2016; McNally, 2017). In pursing their economic interests, new capitalists seek to participate in the state and to establish interpersonal relationships with officials, rather than seek an alternative political regime. Similarly, but coming from a neo-liberal tradition, Yao(2010, 2011) argues that China has a neutral 2 government that pursues the goal of development without endorsing the interests of any class. This picture of a neutral government also implies a state with adequate power over the capitalist class or any other class or group so that it can maintain neutrality. Finally, it is noteworthy that these studies somehow mirror the official ideology of ‘Socialism with Chinese Characteristics’ in that they all contend that capitalists are merely instruments for achieving the fundamental goal, no matter it is economic development or a particular version of socialism. For critical approaches such as Marxian political economy, capital accumulation would not have taken place without the political power of the state, neither the state has a supra-class role over the emerging bourgeoisie. A proper perspective is not a state-market dichotomy, but rather a dialectical relation in which the dynamics of capital accumulation are vitally entangled with the accumulation of political power. Not only does the state provide the regulatory, legal, and repressive framework for private ownership, contracts, and competition to occur, it also tries to contain crises, reduces uncertainty on the return of capital, and guides the accumulation of capital in varied forms (de Brunhoff, 1978). On the other hand, the state also depends on the accumulation of capital for its functioning, either mechanically, through the collection of taxes, or through the more abstract relationship between the accumulation of wealth and the increase of the state’s capacity. Generally speaking, class conflicts, capitalist competition, international forces, and the contradictions generated by accumulation not only shape the state, but are also shaped by the state (Jessop, 2008; Cox, 1981). In this article, we examine the role of the Chinese state in the historical formation of the capitalist class and the changing patterns of the relation between the state and this emerging class with a Marxian political economy methodology. We provide a systematic account of the dialectical relation between the Chinese state and the new capitalist class, and argue that the formation of the new domestic capitalist class is a two-way movement: the top-down forces of the state interacts, conflicts, and compromises with the bottom-up forces of the new economic elites or capitalists. This two-way movement remains a prominent feature of the relation between the state and the capitalist class in China today. In contrast to the studies that talk about classes or interest groups without analyzing class relations,1 we argue that this two-way movement is a process affected by 1Fine(2013) and Chang(2013) have provided comprehensive evaluation and critiques of missing class relations in the developmental state literature. 3 class conflicts, international constraints, and the contradictions within the changing regimes of accumulation. As a result, the relation between the state and the capitalist class has undergone a transition from a stage of what we call ‘Great Compromise’ to a stage of ‘Strained Alliance’. We evidence the dynamics of this relation and suggest how this dynamics links with the regime of accumulation in a broader way. With this, we hope to contribute to the debate on the role of the state in the process of economic transition. In what follows, this article is organized into four sections. In Section 2, we briefly review the literature on the subject and present our approach. Section 3 discusses the relation of the state and the capitalist class during primitive accumulation after Deng Xiaoping’s famous southern tour. There were two main mechanisms for the concentration of capital in private hands: the privatization of state and collective assets, and the expropriation of rural lands. Section 4 discusses the interactions between the state and the capitalist class after primitive accumulation by focusing on the state’s indigenous innovation policies and responses to the accelerated process of financial expansion. Section 5 discusses the further implications of the two-way movement and concludes the article. 2 Literature Review: From the Developmental State to the State as a Social Relation A recent research agenda has proliferated around the complex relation of the state and the new domestic capitalist class in China. A significant part of this literature understands the state as the creator of the new capitalists and that it maintains strict control over the new class (Dickson, 2008; van der Pijl, 2012, 2016). To a large extent, this literature reverberates the notion of the Weberian developmental state as an autonomous, rational actor endowed with a talented bureaucracy with a long-term, coherent, and well-intentioned view of economic development. As Hui puts it in her broad review of the literature on the Chinese state, the state is treated as an actor which is free-standing from society, leaving state-society relations secondary, if not marginalized (Hui, 2017). In a sense, the state in this literature resembles the ‘epistemological entity demanded by the strategies of development’ referenced in Fiori(2003, p. 101)’s critique of Latin American national- developmentalism, where the state is detached from both class interests and capitalist accumulation. 4 Both for Dickson(2008), who calls this new class ‘red capitalists’, and So(2003), who describes the emergence of a ‘cadre-capitalist class’, the Chinese state has adopted a rationally articulated process in order to create capitalists from its own rankings or to co-opt emerging capitalists. Both authors discuss the disproportionate participation of entrepreneurs in the political structures of local and central governments, as well as the enrichment of the families of traditional political elites at all levels. In the same vein, for van der Pijl(2012, 2016), the state has anticipated and guided class formation, leading to a ‘contained capitalist class’, quite harmonious in its relation to political power and disinterested in a broader process of political and economic liberalization. On the contrary, ‘there seems to be a convergence in strengthening the state politically, even in its authoritarian lines’ (van der Pijl, 2012, p.

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